Highlights
• Stock prices continue to climb as investors focus on improving trade news, decent economic data and third quarter earnings results that were better than investors feared.
• We have been seeing a rotation away from growth and defensive stocks toward value and cyclicals, a trend we think could persist if economic growth continues to improve.
• Additionally, we could see a shift toward non-U.S. stocks if the global economy continues to improve.
Equity markets rose again last week, as investors continued to focus on the positives. The possibility of more progress on the trade front, improved manufacturing readings, decent third-quarter earnings results and accelerating corporate deal activity all helped stocks to rise for a fifth straight week. The S&P 500 Index rose close to 1% as financials, industrials and materials outperformed while defensive sectors such as REITs and utilities lagged.1 At the same time, Treasuries continued to sell off amid rising yields.
Weekly Top Themes
1. Optimism over the phase-one U.S./China trade deal helped push markets higher. The latest negotiations suggest the U.S. could hold off on new tariffs in December and possibly even roll back those that were implemented in September. Reports are mixed about overall progress, but trends seem to be moving in a positive direction.
2. Key economic indicators have stabilized, reducing U.S. recession fears. The October Nonmanufacturing ISM Index surprised to the upside on the heels of a better-than-expected October employment report.2
3. The rotation away from defensive and growth sectors toward cyclicals and value has continued. This shift has coincided with the market’s rise over the past several weeks. Over the last month, the S&P 500 Index is up 5%, while the financials and industrials sectors have advanced 7% to 8%.1 At the same time, the utilities and REITs sectors are down 3% to 4%.1
4. Stronger flows into equity funds show improving investor confidence. The pace of flows into global equity ETFs and mutual funds over the past month has been the strongest in nearly two years.3 Given the high amount of cash still sitting on the sidelines, we think this could mean equities still have room for continued growth.
5. Although third-quarter earnings growth has been decent, we think future results could be challenged. Cuts to fourth quarter estimates make us think expectations for 2020 remain too high.
6. Strong merger and acquisition activity shows rising corporate confidence. For example, consider Xerox’s takeover bid for Hewlett Packard and the possibility of private equity firms engaging in the leveraged buyout of Walgreen Company, which would be the largest in history.
7. Despite a noisy political backdrop, investors have been shrugging off possible risks. In addition to the ongoing impeachment investigation, last week featured strong Democratic election results, Michael Bloomberg throwing his hat into the presidential ring and continued scrutiny over Elizabeth Warren’s health care policy plans. So far, investors have largely ignored U.S. political drama.